Certain types of investment instruments allow for losses beyond the capital inherently present in the instrument itself. For example, the sale of a put option—i.e. the obligation to buy the underlying security at the option's strike price—creates excess losses for the seller when the market price of the underlying security falls to a point below the strike price of the option minus the cost of the put. In such a situation, when the put is exercised, the seller must have funds available to cover the losses caused by the low market price. This is in contrast to securities like stocks in which the total amount of capital at risk is put up at the time of the purchase.
Accordingly, an entity trading in these types of securities must have collateral or credit sufficient to cover its potential losses. Because of this requirement, regulatory controls, liquidity issues and risk aversion prevent certain investors from taking advantage of these types of derivative investments, or at least from doing so efficiently or economically. A 40 Act Fund is one example of an entity that is regulated in a way that makes it difficult to invest in option shorts, and the like.